A gavel rests on its sounding block with a several law books and a justice scale out of fucus in the background. A cool blue cast dominates the scene. (A gavel rests on its sounding block with a several law books and a justice scale out of fucus in t

An Ontario court has found that a brokerage firm is not liable for a massive erroneous tax assessment against one of its clients.

The Superior Court of Justice found in favour of TD Waterhouse Canada Inc., which was sued by a client, Zhe Chen, after Chen received a $4.1 million tax bill.

According to the decision, Chen, on the advice of his accountant, did not file a tax return for the 2009 tax year, since he had income of less than $10,000 and had sustained a net loss from his day trading activity.

“The accountant told him that he only needed to file a return if he was going to use his net capital losses from 2009 to offset future capital gains,” the court said.

“Mr. Chen says that he had become disillusioned with day trading so he was not interested in trading in future to make capital gains. Therefore, he decided that he would not file his income tax return for taxation year 2009,” the court noted. “This was a terrible decision.”

The folly of that decision became clear in 2012, when Chen received an assessment from the Canada Revenue Agency (CRA), which pegged his income at $5.2 million, and ordered him to pay $4.1 million in back taxes, penalties and interest.

The basis for the CRA assessment was tax forms provided by TD Waterhouse, which reported the proceeds of Chen’s high-volume day trading activity, but not the costs of acquiring the securities he traded.

As a result, the CRA treated the proceeds as capital gains, as if Chen had paid nothing for the shares traded — leading to the huge tax bill.

Ultimately, Chen did file his 2009 income tax return and had the erroneous assessment corrected, the court noted.

In the meantime, Chen claimed he lost his job and could not find a new one “due to the massive tax assessment issued by CRA,” the court noted.

Chen then sued TD Waterhouse, claiming that it was liable to him for filing tax forms with the CRA that led to his massive tax bill and subsequent troubles.

The court noted that TD Waterhouse files millions of these forms each year, that none of them includes cost information, and that the CRA has never suggested that this was a problem.

It also said that TD Waterhouse provides clients with all of the information they need to fill out their returns, including calculating their own capital gains and losses.

According to the court’s decision, TD Waterhouse also argued that there was no way for it to foresee that Chen would “fail to file his tax return, and then [the] CRA would assess him for a ridiculous amount of tax.”

“Mr. Chen offers no basis to argue that the law might recognize a duty of care on stockbrokers to provide cost information [on] reporting slips to protect the customers from the risk of harm if they unlawfully failed to file their income tax returns and then [the] CRA took aggressive enforcement positions,” the court said in its ruling.

The court found that TD Waterhouse provided Chen with the necessary information to file his taxes and that the information met industry standards.

As a result, the court granted summary judgment dismissing the action.